The Role of Sole Proprietorships

1
The Role of Sole Proprietorships

• A business organization is an establishment
  formed to carry on commercial enterprise. Sole
  proprietorships are the most common form of
  business organization.
• Most sole proprietorships are small. All
  together, sole proprietorships generate only
  about 6 percent of all United States sales.

A sole proprietorship is a business owned and
managed by a single individual.
2
Characteristics of Proprietorships

• Most sole proprietorships earn modest incomes.
• Many proprietors run their businesses part-time.

3
Advantages of Sole Proprietorships
Sole proprietorships offer their owners many
advantages

• Ease of Start-Up
• With a small amount of paperwork and legal
  expenses, just about anyone can start a sole
  proprietorship.
• Relatively Few Regulations
• A proprietorship is the least-regulated form of
  business organization.

• Sole Receiver of Profit
• After paying taxes, the owner of sole
  proprietorship keeps all the profits.
• Full Control
• Owners of sole proprietorships can run their
  businesses as they wish.
• Easy to Discontinue
• Besides paying off legal obligations, such as
  taxes and debt, no other legal obligations need
  to be met to stop doing business.

4
Disadvantages of Sole Proprietorships

• Sole proprietorships have limited access to
  resources, such as physical capital. Human
  capital can also be limited, because no one knows
  everything.

• Sole proprietorships also lack permanence.
  Whenever an owner closes shop due to illness,
  retirement, or any other reason, the business
  ceases to exist.

The biggest disadvantage of sole proprietorships
is unlimited personal liability. Liability is the
legally bound obligation to pay debts.
5
Section 1 Assessment

• 1. Any establishment formed to carry on
  commercial enterprises is a
• (a) partnership.
• (b) business organization.
• (c) sole proprietorship.
• (d) corporation.
• 2. Sole proprietorships
• (a) are complicated to establish.
• (b) make up about 6 percent of all businesses.
• (c) are the most common form of business in the
  United States.
• (d) offer owners little control over operations.

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6
Section 1 Assessment

• 1. Any establishment formed to carry on
  commercial enterprises is a
• (a) partnership.
• (b) business organization.
• (c) sole proprietorship.
• (d) corporation.
• 2. Sole proprietorships
• (a) are complicated to establish.
• (b) make up about 6 percent of all businesses.
• (c) are the most common form of business in the
  United States.
• (d) offer owners little control over operations.

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7
Types of Partnerships

• Partnerships fall into three categories
• General Partnership
• In a general partnership, partners share equally
  in both responsibility and liability.
• Limited Partnership
• In a limited partnership, only one partner is
  required to be a general partner, or to have
  unlimited personal liability for the firm.
• Limited Liability Partnership
• A newer type of partnership is the limited
  liability partnership. In this form, all partners
  are limited partners.

8
Advantages of Partnerships

• Partnerships offer entrepreneurs many benefits.
• 1. Ease of Start-Up
• Partnerships are easy to establish. There is no
  required partnership agreement, but it is
  recommended that partners develop articles of
  partnership.
• 2. Shared Decision Making and Specialization
• In a successful partnership, each partner brings
  different strengths and skills to the business.
• 3. Larger Pool of Capital
• Each partner's assets, or money and other
  valuables, improve the firm's ability to borrow
  funds for operations or expansion.
• 4. Taxation
• Individual partners are subject to taxes, but the
  business itself does not have to pay taxes.

9
Disadvantages of Partnerships

• Unless the partnership is a limited liability
  partnership, at least one partner has unlimited
  liability.
• General partners are bound by each others
  actions.
• Partnerships also have the potential for
  conflict. Partners need to ensure that they agree
  about work habits, goals, management styles,
  ethics, and general business philosophies.

10
Section 2 Assessment

• 1. What advantage does a partnership have over a
  sole proprietorship?
• (a) The responsibility for the business is
  shared.
• (b) The business is easy to start up.
• (c) The partners are not responsible for the
  business debts.
• (d) The business is easy to sell.
• 2. How is a general partnership organized?
• (a) Every partner shares equally in both
  responsibility and liability.
• (b) The doctors, lawyers, or accountants who form
  a general partnership hire others to run the
  partnership.
• (c) No partner is responsible for the debts of
  the partnership beyond his or her investment.
• (d) Only one partner is responsible for the debts
  of the partnership.

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11
Section 2 Assessment

• 1. What advantage does a partnership have over a
  sole proprietorship?
• (a) The responsibility for the business is
  shared.
• (b) The business is easy to start up.
• (c) The partners are not responsible for the
  business debts.
• (d) The business is easy to sell.
• 2. How is a general partnership organized?
• (a) Every partner shares equally in both
  responsibility and liability
• (b) The doctors, lawyers, or accountants who form
  a general partnership hire others to run the
  partnership
• (c) No partner is responsible for the debts of
  the partnership beyond his or her investment
• (d) Only one partner is responsible for the debts
  of the partnership

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12
Types of Corporations

• A corporation is a legal entity, or being, owned
  by individual stockholders.
• Stocks, or shares, represent a stockholders
  portion of ownership of a corporation.
• A corporation which issues stock to a limited a
  number of people is known as a closely held
  corporation.
• A publicly held corporation, buys and sells its
  stock on the open market.

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Advantages of Incorporation

• Advantages for the Stockholders
• Individual investors do not carry responsibility
  for the corporations actions.
• Shares of stock are transferable, which means
  that stockholders can sell their stock to others
  for money.

• Advantages for the Corporation
• Corporations have potential for more growth than
  other business forms.
• Corporations can borrow money by selling bonds.
• Corporations can hire the best available labor to
  create and market the best services or goods
  possible.
• Corporations have long lives.

14
Disadvantages of Incorporation

• Corporations are not without their disadvantages,
  including
• Difficulty and Expense of Start-Up
• Corporate charters can be expensive and time
  consuming to establish. A state license, known as
  a certificate of incorporation, must be obtained.
  
• Double Taxation
• Corporations must pay taxes on their income.
  Owners also pay taxes on dividends, or the
  portion of the corporate profits paid to them.
• Loss of Control
• Managers and boards of directors, not owners,
  manage corporations.
• More Regulation
• Corporations face more regulations than other
  kinds of business organizations.

15
Corporate Combinations

• Horizontal mergers combine two or more firms
  competing in the same market with the same good
  or service.
• Vertical mergers combine two or more firms
  involved in different stages of producing the
  same good or service.
• A conglomerate is a business combination merging
  more than three businesses that make unrelated
  products.

16
Multinationals

• Advantages of MNCs
• Multinationals benefit consumers by offering
  products worldwide. They also spread new
  technologies and production methods across the
  globe.

• Disadvantages of MNCs
• Some people feel that MNCs unduly influence
  culture and politics where they operate. Critics
  of multinationals are concerned about wages and
  working conditions provided by MNCs in foreign
  countries.

Multinational corporations (MNCs) are large
corporations headquartered in one country that
have subsidiaries throughout the world.
17
Section 3 Assessment

• 1. All of the following are advantages of
  incorporation EXCEPT
• (a) the responsibility for the business is shared
• (b) capital is easier to raise than in other
  business forms
• (c) corporations face double taxation
• (d) corporations have more potential for growth
• 2. A horizontal merger
• (a) combines two or more firms involved in
  different stages of producing the same good or
  service.
• (b) combines two or more partnerships into a
  larger partnership.
• (c) combines two or more firms competing in the
  same market with the same good or service.
• (d) combines more than three businesses producing
  unrelated goods.

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18
Section 3 Assessment

• 1. All of the following are advantages of
  incorporation EXCEPT
• (a) the responsibility for the business is shared
• (b) capital is easier to raise than in other
  business forms
• (c) corporations face double taxation
• (d) corporations have more potential for growth
• 2. A horizontal merger
• (a) combines two or more firms involved in
  different stages of producing the same good or
  service.
• (b) combines two or more partnerships into a
  larger partnership.
• (c) combines two or more firms competing in the
  same market with the same good or service.
• (d) combines more than three businesses producing
  unrelated goods.

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19
Business Franchises

• Franchisers develop products and business
  systems, then local franchise owners help to
  produce and sell those products.

• Franchises allow owners a degree of control, as
  well as support from the parent company.

A business franchise is a semi-independent
business that pays fees to a parent company in
return for the exclusive right to sell a certain
product or service in a given area.
20
Advantages and Disadvantages of Business
Franchises

• Advantages of Business Franchises
• Management training and support
• Standardized quality
• National advertising programs
• Financial assistance
• Centralized buying power

• Disadvantages of Business Franchises
• High franchising fees and royalties
• Strict operating standards
• Purchasing restrictions
• Limited product line

21
Cooperatives

• Consumer Cooperatives
• Retail outlets owned and operated by consumers
  are called consumer cooperatives, or purchasing
  cooperatives. Consumer cooperatives sell their
  goods to their members at reduced prices.
• Service Cooperatives
• Cooperatives that provide a service, rather than
  goods, are called service cooperatives.
• Producer Cooperatives
• Producer cooperatives are agricultural marketing
  cooperatives that help members sell their
  products.

A cooperative is a business organization owned
and operated by a group of individuals for their
shared benefit.
22
Nonprofit Organizations

• Professional Organizations
• Professional organizations work to improve the
  image, working conditions, and skill levels of
  people in particular occupations.
• Business Associations
• Business associations promote the business
  interests of a city, state, or other geographical
  area, or of a group of similar businesses.

• Trade Associations
• Nonprofit organizations that promote the
  interests of particular industries are called
  trade associations.
• Labor Unions
• A labor union is an organized group of workers
  whose aim is to improve working conditions,
  hours, wages, and fringe benefits.

Institutions that function like business
organizations, but do not operate for profits are
nonprofit organizations. Nonprofit organizations
are exempt from federal income taxes.
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Section 4 Assessment

• 1. A business franchise
• (a) attempts to improve the image and working
  conditions of people in a particular occupation.
• (b) operates without the aim of profit.
• (c) is a semi-independent business tied to a
  parent company.
• (d) is not required to pay income taxes.
• 2. Consumer cooperatives
• (a) are owned and operated by consumers.
• (b) provide a service, rather than a good.
• (c) help members sell their agricultural
  products.
• (d) pay no income tax.

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24
Section 4 Assessment

• 1. A business franchise
• (a) attempts to improve the image and working
  conditions of people in a particular occupation.
• (b) operates without the aim of profit.
• (c) is a semi-independent business tied to a
  parent company.
• (d) is not required to pay income taxes.
• 2. Consumer cooperatives
• (a) are owned and operated by consumers.
• (b) provide a service, rather than a good.
• (c) help members sell their agricultural
  products.
• (d) pay no income tax.

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